A:

A Ginnie Mae, or Government National Mortgage Association security, functions similarly to the process of lending someone money to purchase a house or business. Ginnie Mae buys home mortgages from banks and financial institutions, bundles them together, and then markets portions of these bundles to investors.

For example, if you invest $100,000 in a Ginnie Mae, you are essentially lending someone money to buy a house or business with the help and the guarantee of a government organization. You would receive monthly payments consisting of interest on the loan and perhaps also a portion of the principal. These are similar to the payments a bank receives when it lends money to a home or business buyer. If it isn't included in the monthly payment, the principal is paid back at the end of a specified time period.

Ginnie Maes are the most popular type of mortgage backed securities because they are guaranteed by the U.S. government. They are not impervious to risk, but the government will step in to prevent the collapse of Ginnie Mae and its securities.

To learn more, see Profit From Mortgage Debt With MBS.

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